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<!DOCTYPE html><html lang="en-US"><head><meta charset="UTF-8" /><meta http-equiv="X-UA-Compatible" content="IE=edge"><link rel="pingback" href="https://www.softwaresuggest.com/blog/xmlrpc.php" /> <script type="text/javascript">document.documentElement.className = 'js';</script> <meta name='robots' content='index, follow, max-image-preview:large, max-snippet:-1, max-video-preview:-1' /> <title>What Is the FIFO Method? A Complete Guide to First-In, First-Out Inventory</title><meta name="description" content="Learn how to apply the FIFO inventory valuation method, understand its impact on financials, and implement best practices for accurate reporting." /><link rel="canonical" href="https://www.softwaresuggest.com/blog/fifo-method/" /><meta property="og:locale" content="en_US" /><meta property="og:type" content="article" /><meta property="og:title" content="What Is the FIFO Method? A Complete Guide to First-In, First-Out Inventory" /><meta property="og:description" content="Learn how to apply the FIFO inventory valuation method, understand its impact on financials, and implement best practices for accurate reporting." /><meta property="og:url" content="https://www.softwaresuggest.com/blog/fifo-method/" /><meta property="og:site_name" content="SoftwareSuggest Blog" /><meta property="article:published_time" content="2024-11-07T16:30:47+00:00" /><meta property="article:modified_time" content="2024-11-18T04:00:43+00:00" /><meta property="og:image" content="https://blogimages.softwaresuggest.com/blog/wp-content/uploads/2024/11/07190226/what-is-the-fifo-method-a-detailed-guide.png" /><meta property="og:image:width" content="1200" /><meta property="og:image:height" content="650" /><meta property="og:image:type" content="image/png" /><meta name="author" content="Rohit Rajpal" /><meta name="twitter:card" content="summary_large_image" /><meta name="twitter:label1" 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background-color: #eff8ff; } .last_btn_li { padding: 4px 0px; } .header-item-right { position: relative; } .ssblogheader .ctmenu-mobile-toggle { position: absolute; display: block; cursor: pointer; width: 2.75rem; border: none; background: none; transition: 0.35s ease-in-out; right: 0; top: 12px; } .ssblogheader .ctmenu.active { transform: translate(0%); } .ssblogheader .ctmenu>ul>li { display: block; margin: 0; } .ssblogheader .ctmenu>ul>li>a { display: block; height: 3.125rem; padding: 0 3.125rem 0 1rem; border-bottom: 1px solid rgba(0, 0, 0, 0.1); cursor: pointer; } .ssblogheader .ctmenu .ctmenu-mobile-ssblogheader { display: flex; position: sticky; justify-content: space-between; top: 0; height: 3.125rem; z-index: 110; border-bottom: 1px solid rgba(0, 0, 0, 0.1); } .ssblogheader .ctmenu .ctmenu-mobile-ssblogheader .ctmenu-mobile-arrow{ display: none; font-size: 1.25rem; } .ssblogheader .ctmenu .ctmenu-mobile-ssblogheader .ctmenu-mobile-close{ font-size: 2.25rem; } .ssblogheader 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jQuery(document.body).append( jQuery('.exit-intent-popup').detach() ); eventListener = document.addEventListener("click", function (clickEvent) { var inPopup = false; var date = new Date(); date.setTime(date.getTime() + (24*60*60*1000)); var expires = "; expires="+date.toGMTString(); document.cookie = "exitintentpopup=true;path=/;expires="+date.toUTCString(); if (!inPopup) hide(clickEvent); }); var hiddenInputexit = document.createElement("input"); hiddenInputexit.type = "hidden"; hiddenInputexit.name = "optimonster_exit"; hiddenInputexit.value = "1"; // Append the hidden input to the form document.querySelector(".exit_main_form").appendChild(hiddenInputexit); }) // exit intent on click optimonster poup button End</script> <article id="post-122525" class="et_pb_post post-122525 post type-post status-publish format-standard has-post-thumbnail hentry category-inventory-management"><div class="et_post_meta_wrapper"> </div> <div class="entry-content newentrycontent"><div class="tocpluscontent ssflex"><div class="gridPostLayout comthemecontentdiv"><div class="lwptoc lwptoc-grid-one bothtempcomclass" id="cmidtocdiv"><div class="lwptoc lwptoc-autoWidth lwptoc-baseItems lwptoc-light lwptoc-notInherit" data-smooth-scroll="1" data-smooth-scroll-offset="24"><div class="lwptoc_i"><div class="lwptoc_header"> <span class="lwptoc_toggle"> <a href="#" class="lwptoc_toggle_label" data-label="show">hide</a> </span></div><div class="lwptoc_items lwptoc_items-visible"><div class="lwptoc_itemWrap"><div class="lwptoc_item"> <a href="#what-is-first-in-first-out-fifo"> <span class="lwptoc_item_label">What Is First In, First Out (FIFO)?</span> </a></div><div class="lwptoc_item"> <a href="#how-does-the-fifo-method-work"> <span class="lwptoc_item_label">How Does the FIFO Method Work?</span> </a></div><div class="lwptoc_item"> <a href="#when-to-use-the-fifo-inventory-method"> <span class="lwptoc_item_label">When to Use the FIFO Inventory Method?</span> </a></div><div class="lwptoc_item"> <a href="#advantages-of-the-fifo-method"> <span class="lwptoc_item_label">Advantages of the FIFO Method</span> </a></div><div class="lwptoc_item"> <a href="#disadvantages-of-the-fifo-method"> <span class="lwptoc_item_label">Disadvantages of the FIFO Method</span> </a></div><div class="lwptoc_item"> <a href="#how-is-the-fifo-method-calculated"> <span class="lwptoc_item_label">How Is the FIFO Method Calculated?</span> </a></div><div class="lwptoc_item"> <a href="#best-practices-for-implementing-fifo"> <span class="lwptoc_item_label">Best Practices for Implementing FIFO</span> </a></div></div></div></div></div></div><div class="postconetndiv postconetndiv-content"><div class="newlautor content_author ssflex ssaligncenter"><div class="readtime ssflex ssaligncenter"> <span class="checkcirclebgq"></span> <span class="span-reading-time rt-reading-time"><span class="rt-label rt-prefix">Reading Time:</span> <span class="rt-time"> 8</span> <span class="rt-label rt-postfix">Minutes</span></span></div><div class="datepauthtxt ssflex ssaligncenter"> <span class="checkcirclebgq"></span> <span>Published : </span> November 7, 2024</div><div class="readtime ssflex ssaligncenter"> <span class="checkcirclebgq"></span> Last Updated: November 18, 2024</div></div><blockquote><p><i><span style="font-weight: 400;">Efficiency is doing things right. Effectiveness is doing the right things.</span></i> <b><i>– Peter Drucker</i></b></p></blockquote><p><span style="font-weight: 400;">FIFO (First-In, First-Out) aligns with this principle by serving as a critical framework in inventory management and accounting. It plays a crucial role in various industries, from retail to manufacturing, and helps businesses accurately track their stock movement and financial performance.</span></p><div class="nssbluebox"><p class="txtpnss"><img decoding="async" class="lazy lazy-hidden nssimg" src="//www.softwaresuggest.com/blog/wp-content/plugins/a3-lazy-load/assets/images/lazy_placeholder.gif" data-lazy-type="image" data-src="https://www.softwaresuggest.com/blog/wp-content/uploads/2020/05/leftarowmbs.png" alt="leftarrow image"><noscript><img decoding="async" class="nssimg" src="https://www.softwaresuggest.com/blog/wp-content/uploads/2020/05/leftarowmbs.png" alt="leftarrow image"></noscript><span class="nssbold">Looking for Inventory Management Software?</span> Check out SoftwareSuggest’s list of the <a class="nsslinkund" href="https://www.softwaresuggest.com/inventory-management-software" data-wpel-link="internal" target="_blank">Best Inventory Management Software</a> solutions.</p></div><p><span style="font-weight: 400;">FIFO affects financial reporting, taxes, and operational efficiency. Managers, accountants, and business owners benefit from mastering FIFO to <a href="https://www.softwaresuggest.com/blog/inventory-optimization/" data-wpel-link="internal" target="_blank">optimize inventory systems</a> and financial practices. </span></p><p><span style="font-weight: 400;">But what is the FIFO method? Let’s understand in detail along with a FIFO example.</span></p><style>.protiptitle { font-size: 24px; font-weight: 600; color: #465671; color: #0f1e3c; margin-top: 0px; margin-bottom: 8px; } .lwptoc_itemWrap .lwptoc_item:nth-child(1) a:after { content: ""; width: 53px; height: 18px; background: url(https://www.softwaresuggest.com/blog/wp-content/uploads/custom_upl/pro_tip.svg) no-repeat; background-size: 100% 100%; display: block; margin-left: 0; margin-bottom: -3px; margin-top: 3px; } .lwptoc_item .lwptoc_itemWrap .lwptoc_item a:after { content: unset; } .ssblog_protips_card_main { background: #e3fcef !important; box-shadow: 0px 4px 20px rgba(45, 45, 45, 0.16); border-radius: 10px; padding: 34px 24px; margin-bottom: 14px; } .iscmrg { margin-top: 12px; } .ssblog_expertips_card_main_body { display: flex; } .ssblog_protip_card_img_div { margin-right: 8px; width: 10%; margin-top: 0px; text-align: center; } .ssblog_expertips_card_prgrph { line-height:1.8; } .ssblog_expertips_card_content { width: 90%; } .ssblog_expertips_card_content a { font-size: 15px; margin-top: 10px; color:#508dd8; text-decoration: none !important; } .type-post .entry-content .blog-trialbtn { background-color: #001965; padding: 14px 28px!important; border-radius: 8px!important; color: #fff !important; display: inline-block; font-size: 18px!important; margin-top: 18px; } @media (max-width:480px) { .ssblog_protips_card_main { padding: 24px 14px; } .ssblog_protip_card_img_div { width: 14%; } }</style><div class="ssblog_protips_card_main"><div class="ssblog_expertips_card_main_body"><div class="ssblog_protip_card_img_div"> <img decoding="async" loading="lazy" class="lazy lazy-hidden lazyloaded" src="//www.softwaresuggest.com/blog/wp-content/plugins/a3-lazy-load/assets/images/lazy_placeholder.gif" data-lazy-type="image" data-src="https://images.softwaresuggest.com/static-frontend/protip_sscv.svg" alt="protip image" height="50" width="90"><noscript><img decoding="async" loading="lazy" class="lazyloaded" src="https://images.softwaresuggest.com/static-frontend/protip_sscv.svg" alt="protip image" height="50" width="90"></noscript></div><div class="ssblog_expertips_card_content"><div class="protiptitle">Pro-tip</div><p class="ssblog_expertips_card_prgrph">When implementing FIFO, create a robust system that aligns your physical inventory with your digital records. Invest in quality inventory management software, train your staff thoroughly, and conduct regular audits. Consistently review and refine your processes to adapt to changing business needs and market conditions.</p></div></div></div><h2><span id="what-is-first-in-first-out-fifo"><strong>What Is First In, First Out (FIFO)?</strong></span></h2><p><span style="font-weight: 400;">FIFO method assumes that the earliest acquired items are the first to leave inventory, regardless of their actual usage order. The FIFO inventory valuation method is widely applied across industries, particularly when managing goods with short shelf lives or rapidly evolving technologies.</span></p><p><span style="font-weight: 400;">It helps businesses accurately track </span><a href="https://www.shipbob.com/blog/inventory-cost/" data-wpel-link="internal" target="_blank"><span style="font-weight: 400;">inventory costs</span></a><span style="font-weight: 400;">, calculate profits, and manage stock levels. The FIFO inventory method has significant effects on company financial reports, tax filings, and strategic choices. It can lead to higher reported profits during inflation periods, as older, less expensive inventory is expensed first while newer, potentially pricier items remain in stock.</span></p><p><iframe loading="lazy" class="lazy lazy-hidden red23" style="border: 0px #FFFFFF none; height: 26em;" data-lazy-type="iframe" data-src="https://www.softwaresuggest.com/itopsoftwares/index?s=inventory-management" name="myiFrame" width="100%" height="480" frameborder="1" marginwidth="0px" marginheight="0px" scrolling="no" sandbox="allow-scripts allow-same-origin allow-popups" allowfullscreen="allowfullscreen"></iframe><noscript><iframe loading="lazy" class="red23" style="border: 0px #FFFFFF none; height: 26em;" src="https://www.softwaresuggest.com/itopsoftwares/index?s=inventory-management" name="myiFrame" width="100%" height="480" frameborder="1" marginwidth="0px" marginheight="0px" scrolling="no" sandbox="allow-scripts allow-same-origin allow-popups" allowfullscreen="allowfullscreen"></iframe></noscript></p><h2><span id="how-does-the-fifo-method-work"><strong>How Does the FIFO Method Work?</strong></span></h2><p><span style="font-weight: 400;">As mentioned above, the FIFO method operates on a simple principle: the first items to enter inventory are the first ones sold or used. It closely mirrors the natural flow of inventory in many businesses.</span></p><p><img decoding="async" loading="lazy" class="lazy lazy-hidden aligncenter wp-image-122588 size-full" src="//www.softwaresuggest.com/blog/wp-content/plugins/a3-lazy-load/assets/images/lazy_placeholder.gif" data-lazy-type="image" data-src="https://blogimages.softwaresuggest.com/blog/wp-content/uploads/2024/11/07190221/fifo.png" alt="how does the fifo method work? by softwaresuggest" width="1200" height="631"><noscript><img decoding="async" loading="lazy" class="aligncenter wp-image-122588 size-full" src="https://blogimages.softwaresuggest.com/blog/wp-content/uploads/2024/11/07190221/fifo.png" alt="how does the fifo method work? by softwaresuggest" width="1200" height="631"></noscript></p><p><span style="font-weight: 400;">Here’s how it works in practice.</span></p><ol><li style="font-weight: 400;" aria-level="1"><b>Inventory tracking:</b><span style="font-weight: 400;"> Companies maintain detailed records of when items are purchased or produced, along with their costs.</span></li><li style="font-weight: 400;" aria-level="1"><b>Sales calculation</b><span style="font-weight: 400;">: When a sale occurs, the cost of the oldest inventory items is used to calculate the cost of goods sold.</span></li><li style="font-weight: 400;" aria-level="1"><b>Remaining inventory:</b><span style="font-weight: 400;"> Newer inventory items, potentially with different costs, remain in stock for future sales.</span></li><li style="font-weight: 400;" aria-level="1"><b>Financial reporting:</b><span style="font-weight: 400;"> The cost of goods sold reflects older inventory prices, while the remaining inventory value on the <a href="https://www.softwaresuggest.com/blog/balance-sheet/" data-wpel-link="internal" target="_blank">balance sheet</a> represents more recent costs.</span></li></ol><h2><span id="when-to-use-the-fifo-inventory-method"><span style="font-weight: 400;"><strong>When to Use the FIFO Inventory Method?</strong> </span></span></h2><p><span style="font-weight: 400;">The FIFO inventory method is ideal in several business scenarios:</span></p><ul><li style="font-weight: 400;" aria-level="1"><b>Perishable goods:</b><span style="font-weight: 400;"> Industries dealing with food, pharmaceuticals, or other items with limited shelf life benefit from FIFO’s logical flow.</span></li><li style="font-weight: 400;" aria-level="1"><b>Fashion and technology:</b><span style="font-weight: 400;"> Sectors with rapid product turnover use FIFO to accurately reflect the cost of newer, potentially more expensive items in inventory.</span></li><li style="font-weight: 400;" aria-level="1"><b>Inflationary economies: </b><span style="font-weight: 400;">FIFO can be beneficial in industries experiencing rising prices as it typically results in lower reported expenses for goods sold and higher profit figures.</span></li><li style="font-weight: 400;" aria-level="1"><b>Simplicity in tracking:</b><span style="font-weight: 400;"> For businesses seeking a straightforward inventory valuation method, FIFO offers ease of implementation and understanding.</span></li><li style="font-weight: 400;" aria-level="1"><b>Financial statement accuracy:</b><span style="font-weight: 400;"> FIFO often provides a more current and accurate representation of inventory value on the balance sheet.</span></li></ul><h2><span id="advantages-of-the-fifo-method"><strong>Advantages of the FIFO Method</strong></span></h2><p><span style="font-weight: 400;">The top four advantages of the First in, First out inventory method are its ability to provide accurate profit margins, simplify cost calculations, align with international standards, and maintain up-to-date inventory data. Let’s understand these in detail.</span></p><p><img decoding="async" loading="lazy" class="lazy lazy-hidden aligncenter wp-image-122589 size-full" src="//www.softwaresuggest.com/blog/wp-content/plugins/a3-lazy-load/assets/images/lazy_placeholder.gif" data-lazy-type="image" data-src="https://blogimages.softwaresuggest.com/blog/wp-content/uploads/2024/11/07190223/top-benefits-of-the-fifo-method.png" alt="top benefits of the fifo method by softwaresuggest" width="1200" height="548"><noscript><img decoding="async" loading="lazy" class="aligncenter wp-image-122589 size-full" src="https://blogimages.softwaresuggest.com/blog/wp-content/uploads/2024/11/07190223/top-benefits-of-the-fifo-method.png" alt="top benefits of the fifo method by softwaresuggest" width="1200" height="548"></noscript></p><h3><strong>1. Accurate Profit Margins</strong></h3><p><span style="font-weight: 400;">FIFO provides a more realistic representation of profit margins, especially in industries with fluctuating prices. It matches current sales prices with historical costs, reflecting actual profit per sale. <a href="https://www.softwaresuggest.com/blog/inventory-tracking/" data-wpel-link="internal" target="_blank">Precise inventory tracking</a> also allows companies to determine which products generate the most profit, adjust prices effectively, and make smart choices about which items to stock and invest in.</span></p><h3><strong>2. Simplified Cost Calculation</strong></h3><p><span style="font-weight: 400;">The FIFO method’s logical approach to inventory flow makes cost tracking and calculation easier. This simplicity reduces accounting errors, speeds up month-end closings, and streamlines audits. The simplifies onboarding for new employees and streamlines accounting processes, which reduces overall operational expenses.</span></p><h3><strong>3. Alignment with International Standards</strong></h3><p><span style="font-weight: 400;">First in, First out inventory method is compliant with IFRS and GAAP, which makes it ideal for companies with global operations or aspirations. This ensures consistent financial reporting across different countries, facilitates easier comparisons with competitors, and can improve a company’s credibility with international investors and partners. It also simplifies the process of mergers, acquisitions, or entering new markets.</span></p><h3><strong>4. Up-to-date Inventory data</strong></h3><p><span style="font-weight: 400;">By assuming older stock is sold first, FIFO ensures the balance sheet reflects more recent purchase prices in inventory valuation. This offers a more precise valuation of current stock levels and enhances the accuracy of financial ratios and forecasts. It also aids in better inventory management by helping businesses make more informed decisions about restocking, pricing, and product lifecycle management.</span></p><div class="nssbluebox"><p class="txtpnss"><img decoding="async" loading="lazy" class="lazy lazy-hidden idea_image_bg" src="//www.softwaresuggest.com/blog/wp-content/plugins/a3-lazy-load/assets/images/lazy_placeholder.gif" data-lazy-type="image" data-src="https://images.softwaresuggest.com/static-frontend/blog-idea.svg" alt="blog idea bulb" width="24px" height="24px"><noscript><img decoding="async" loading="lazy" class="idea_image_bg" src="https://images.softwaresuggest.com/static-frontend/blog-idea.svg" alt="blog idea bulb" width="24px" height="24px"></noscript><span class="nssbold">Suggested Read: <a class="nsslinkund" href="https://www.softwaresuggest.com/blog/importance-of-inventory-management/" data-wpel-link="internal" target="_blank">The Importance of Inventory Management? (Benefits & Methods)</a></span></p></div><h2><span id="disadvantages-of-the-fifo-method"><span style="font-weight: 400;"><strong>Disadvantages of the FIFO Method</strong> </span></span></h2><p><span style="font-weight: 400;">The FIFO method, while beneficial in many scenarios, does have some drawbacks. Here are the key disadvantages of the FIFO method.</span></p><p><img decoding="async" loading="lazy" class="lazy lazy-hidden aligncenter wp-image-122587 size-full" src="//www.softwaresuggest.com/blog/wp-content/plugins/a3-lazy-load/assets/images/lazy_placeholder.gif" data-lazy-type="image" data-src="https://blogimages.softwaresuggest.com/blog/wp-content/uploads/2024/11/07190217/drawbacks-of-the-fifo-method.png" alt="drawbacks of the fifo method by softwraesuggest" width="1200" height="513"><noscript><img decoding="async" loading="lazy" class="aligncenter wp-image-122587 size-full" src="https://blogimages.softwaresuggest.com/blog/wp-content/uploads/2024/11/07190217/drawbacks-of-the-fifo-method.png" alt="drawbacks of the fifo method by softwraesuggest" width="1200" height="513"></noscript></p><h3><strong>1. Higher Taxes in Inflation</strong></h3><p><span style="font-weight: 400;">In times of rising prices, FIFO results in higher reported earnings because it pairs current sale prices with inventory purchased at earlier, lower costs. This increased profit results in higher tax liabilities. Companies may find themselves paying more in taxes without a corresponding <a href="https://www.softwaresuggest.com/blog/how-to-improve-cash-flow/" data-wpel-link="internal" target="_blank">increase in cash flow</a>, potentially straining their financial resources.</span></p><h3><strong>2. More complicated than LIFO</strong></h3><p><span style="font-weight: 400;">While FIFO is generally straightforward, it can be more complex to implement than <a href="https://www.softwaresuggest.com/blog/lifo-method/" data-wpel-link="internal" target="_blank">LIFO (Last-In, First-Out)</a> in certain situations. FIFO requires detailed record-keeping of purchase dates and costs for each inventory batch. The complexity increases administrative overhead and introduces a higher risk of errors in inventory valuation and financial reporting, especially for businesses with large, diverse products or frequent stock turnover.</span></p><h3><strong>3. Unfit for price volatility</strong></h3><p><span style="font-weight: 400;">First in, First out inventory method is ill-suited for industries with highly volatile prices, such as commodities (oil, gold, agricultural products), technology (computer chips, electronic components), and fashion. In these sectors, rapid price fluctuations can lead to a significant mismatch between reported profits and actual inventory replacement costs.</span></p><p><span style="font-weight: 400;">For instance, during a sharp rise in oil prices, an energy company using FIFO might report artificially high profits as sales are matched with older, cheaper inventory. This discrepancy can result in misleading financial statements that don’t accurately reflect the company’s true financial position or operational challenges.</span></p><h2><span id="how-is-the-fifo-method-calculated"><strong>How Is the FIFO Method Calculated?</strong></span></h2><p><span style="font-weight: 400;">The FIFO method calculates inventory costs by assuming that the oldest items are sold first. Here’s the basic formula.</span></p><p><strong>FIFO Method Formula</strong></p><style>.single_blog_heading_para_bg{ background-color: #F2F8FB; padding:35px; border-radius: 1.25rem; } .single_blog_heading_para_bg .heading_type{ font-size: 20px; font-weight: 700; margin-bottom: 20px; line-height:1.3; } .single_blog_heading_para_bg p{ margin:0; }</style><div class="single_blog_heading_para_bg"><p><b>Ending Inventory Value</b> = Ending Inventory Value = (Remaining Units × Their Respective Purchase Costs)</p></div><p><span style="font-weight: 400;">The method for calculating the final inventory value remains consistent across different accounting approaches. Use this formula to determine the ending inventory.</span></p><style>.single_blog_heading_para_bg{ background-color: #F2F8FB; padding:35px; border-radius: 1.25rem; } .single_blog_heading_para_bg .heading_type{ font-size: 20px; font-weight: 700; margin-bottom: 20px; line-height:1.3; } .single_blog_heading_para_bg p{ margin:0; }</style><div class="single_blog_heading_para_bg"><p><b>COGS</b> = (Units Sold × Cost of Oldest Inventory) + (Remaining Units × Cost of Next Oldest Inventory)</p></div><p><span style="font-weight: 400;">To explain how FIFO works in practice, let’s consider an example of a small bookstore managing its inventory of bestselling novels over a quarter:</span></p><p><b>Inventory Purchases</b></p><ul><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">April 5: 300 books at $15 each (Total: $4,500)</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">May 20: 250 books at $16 each (Total: $4,000)</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">June 15: 400 books at $14 each (Total: $5,600)</span></li></ul><p><b>Sales</b><span style="font-weight: 400;">: 500 books sold at $25 each (Total Revenue: $12,500)</span></p><p><b>COGS Calculation</b></p><ul><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">300 books from April 5: 300 × $15 = $4,500</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">200 books from May 20: 200 × $16 = $3,200</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Total COGS: $4,500 + $3,200 = $7,700</span></li></ul><p><b>Ending Inventory</b></p><ul><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">50 books from May 20: 50 × $16 = $800</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">400 books from June 15: 400 × $14 = $5,600</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Total ending inventory value: $800 + $5,600 = $6,400</span></li></ul><div class="nssbluebox"><p class="txtpnss"><img decoding="async" loading="lazy" class="lazy lazy-hidden idea_image_bg" src="//www.softwaresuggest.com/blog/wp-content/plugins/a3-lazy-load/assets/images/lazy_placeholder.gif" data-lazy-type="image" data-src="https://images.softwaresuggest.com/static-frontend/blog-idea.svg" alt="blog idea bulb" width="24px" height="24px"><noscript><img decoding="async" loading="lazy" class="idea_image_bg" src="https://images.softwaresuggest.com/static-frontend/blog-idea.svg" alt="blog idea bulb" width="24px" height="24px"></noscript><span class="nssbold">Related Read: <a class="nsslinkund" href="https://www.softwaresuggest.com/blog/inventory-turnover-ratio/" data-wpel-link="internal" target="_blank">Inventory Turnover Ratio: Works, Calculation & Example</a></span></p></div><h2><span id="best-practices-for-implementing-fifo"><strong>Best Practices for Implementing FIFO</strong></span></h2><p><span style="font-weight: 400;">Implementing the First-In, First-Out (FIFO) method effectively can significantly improve your inventory management and financial reporting. Here are key best practices to ensure successful implementation of the FIFO inventory valuation method.</span></p><p><img decoding="async" loading="lazy" class="lazy lazy-hidden aligncenter wp-image-122586 size-full" src="//www.softwaresuggest.com/blog/wp-content/plugins/a3-lazy-load/assets/images/lazy_placeholder.gif" data-lazy-type="image" data-src="https://blogimages.softwaresuggest.com/blog/wp-content/uploads/2024/11/07190214/best-practices-for-implementing-fifo-successfully.png" alt="best practices for implementing fifo-successfully by softwaresuggest" width="1200" height="481"><noscript><img decoding="async" loading="lazy" class="aligncenter wp-image-122586 size-full" src="https://blogimages.softwaresuggest.com/blog/wp-content/uploads/2024/11/07190214/best-practices-for-implementing-fifo-successfully.png" alt="best practices for implementing fifo-successfully by softwaresuggest" width="1200" height="481"></noscript></p><h3><strong>1. Accurate Record-Keeping</strong></h3><p><span style="font-weight: 400;">Accurate record-keeping ensures that you have a clear, real-time understanding of your inventory levels, costs, and movements. Without precise records, it’s impossible to correctly apply FIFO principles, which can lead to errors in financial reporting and inventory valuation.</span></p><p><span style="font-weight: 400;">Here are some tips to maintain accurate records.</span></p><ul><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Implement a robust inventory management system to track all purchases and sales.</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Document key information for each inventory item, including purchase date, quantity, and price.</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Utilize <a href="https://www.softwaresuggest.com/blog/rfid-vs-barcode/" data-wpel-link="internal" target="_blank">barcode scanners or RFID systems</a> to automate data entry and minimize errors.</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Regularly reconcile digital records with physical inventory counts.</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Educate staff on the importance of accurate data entry and proper inventory record-keeping.</span></li></ul><h3><strong>2. Physical Organization of Inventory</strong></h3><p><span style="font-weight: 400;">Organizing your physical inventory makes it easier to ensure older stock is used or sold first. This reduces the risk of </span><a href="https://www.investopedia.com/terms/o/obsoleteinventory.asp" data-wpel-link="internal" target="_blank"><span style="font-weight: 400;">inventory obsolescence</span></a><span style="font-weight: 400;">, minimizes waste for perishable goods, and helps maintain consistency between your physical stock and accounting records.</span></p><p><span style="font-weight: 400;">Follow these four steps to organize your inventory.</span></p><ul><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Arrange storage areas with clear “first in, first out” lanes or shelving.</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Use a “two-bin” system where possible, refilling the front bin only when it’s empty.</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Implement clear labeling systems, including purchase dates or expiration dates.</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Conduct regular audits to ensure physical organization aligns with FIFO principles.</span></li></ul><h3><strong>3. Invest in Staff Training and Education</strong></h3><p><span style="font-weight: 400;">FIFO is only effective if everyone involved in inventory management understands and follows the principles consistently. Effective training aligns staff practices, reduces mistakes, and improves overall inventory accuracy.</span></p><p><span style="font-weight: 400;">Here are some tips.</span></p><ul><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Develop comprehensive training materials explaining FIFO principles and their importance.</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Implement regular training programs for both new team members and long-term employees to keep skills up-to-date.</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Incorporate real-world scenarios and interactive learning exercises to illustrate how FIFO operates in daily business situations.</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Create an environment that welcomes questions and offers continuous guidance to resolve any confusion.</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Create easily accessible reference guides for common FIFO-related tasks.</span></li></ul><h3><strong>4. Conduct Regular Inventory Audits</strong></h3><p><span style="font-weight: 400;">Regular audits help identify discrepancies between recorded inventory and physical stock. They’re crucial for maintaining the accuracy of your FIFO system, catching errors early, and ensuring that your financial reporting reflects reality.</span></p><p><span style="font-weight: 400;">Here’s how to effectively conduct inventory audits.</span></p><ul><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Schedule regular full inventory counts (e.g., annually or semi-annually)</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Implement cycle counting for ongoing partial inventory audits</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Use barcode scanners or RFID technology to speed up the counting process</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Compare physical counts to system records and investigate any discrepancies</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Use audit results to improve processes and identify areas for additional staff training</span></li></ul><h3><strong>5. Integration with Accounting Systems</strong></h3><p><span style="font-weight: 400;">Seamless integration between inventory management and <a href="https://www.softwaresuggest.com/accounting-software" data-wpel-link="internal" target="_blank">accounting systems</a> ensures FIFO calculations are correctly reflected in financial reports. This provides real-time cost of goods sold figures, improves the accuracy of profit calculations, and simplifies the financial reporting process.</span></p><p><span style="font-weight: 400;">Follow these five steps to ensure proper integration.</span></p><ul><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Select inventory management software that works well with your existing accounting system.</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Set up automated data transfers between systems to reduce manual entry errors.</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Configure your systems to calculate COGS using FIFO principles automatically.</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Regularly reconcile inventory valuations between systems to catch any discrepancies.</span></li><li style="font-weight: 400;" aria-level="1"><span style="font-weight: 400;">Work with your accounting team to ensure they understand how FIFO data flows into financial reports.</span></li></ul><div class="nssbluebox"><p class="txtpnss"><img decoding="async" loading="lazy" class="lazy lazy-hidden idea_image_bg" src="//www.softwaresuggest.com/blog/wp-content/plugins/a3-lazy-load/assets/images/lazy_placeholder.gif" data-lazy-type="image" data-src="https://images.softwaresuggest.com/static-frontend/blog-idea.svg" alt="blog idea bulb" width="24px" height="24px"><noscript><img decoding="async" loading="lazy" class="idea_image_bg" src="https://images.softwaresuggest.com/static-frontend/blog-idea.svg" alt="blog idea bulb" width="24px" height="24px"></noscript><span class="nssbold">Related Read: <a class="nsslinkund" href="https://www.softwaresuggest.com/blog/inventory-management-techniques/" data-wpel-link="internal" target="_blank">17 Key Inventory Management Techniques & Methods</a></span></p></div><p><strong>Conclusion</strong></p><p><span style="font-weight: 400;">The FIFO method offers accuracy in profit margins, simplifies cost calculations, aligns with international standards, and provides up-to-date inventory data. While it may lead to higher taxes during inflation and struggle with price volatility, its benefits often outweigh these challenges.</span></p><p><span style="font-weight: 400;">When properly implemented, FIFO helps companies streamline their inventory processes, enhance decision-making, and maintain clear financial records. Successful implementation of the FIFO method requires accurate record-keeping, physical organization of inventory, staff training, regular audits, and integration with accounting systems.</span></p><style>.faqpar { padding: 2rem; margin: 22px 0px; border-radius: 8px; box-shadow: rgba(0, 0, 0, 0.1) 0px 4px 12px; } .faqaccordion .accordion-item { border-bottom: 1px solid #e5e5e5; } .faqaccordion .accordion-item .faqtlmn[aria-expanded=true] { border-bottom: 1px solid #03b5d2; } .faqaccordion .faqtlmn { position: relative; display: block; text-align: left; width: 100%; padding: 1em 0; color: #333; font-size: 1.15rem; font-weight: 400; border: none; background: none; outline: none; } .faqaccordion .faqtlmn:hover, .faqaccordion .faqtlmn:focus { cursor: pointer; color: #03b5d2; } .faqaccordion .faqtlmn:hover::after, .faqaccordion .faqtlmn:focus::after { cursor: pointer; color: #03b5d2; border: 1px solid #03b5d2; } .faqaccordion .faqtlmn .accordion-title { padding: 1em 1.5em 1em 0; } .faqaccordion .faqtlmn .icon { display: inline-block; position: absolute; top: 18px; right: 0; width: 22px; height: 22px; border: 1px solid; border-radius: 22px; } .faqaccordion .faqtlmn .icon::before { display: block; position: absolute; content: ""; top: 9px; left: 5px; width: 10px; height: 2px; background: currentColor; } .faqaccordion .faqtlmn .icon::after { display: block; position: absolute; content: ""; top: 5px; left: 9px; width: 2px; height: 10px; background: currentColor; } .faqaccordion .faqtlmn[aria-expanded=true] { color: #03b5d2; } .faqaccordion .faqtlmn[aria-expanded=true] .icon::after { width: 0; } .faqaccordion .faqtlmn[aria-expanded=true] + .accordion-content { opacity: 1; max-height: 100%; transition: all 200ms linear; will-change: opacity, max-height; } .faqaccordion .accordion-content { opacity: 0; max-height: 0; overflow: hidden; transition: opacity 200ms linear, max-height 200ms linear; will-change: opacity, max-height; } .faqaccordion .accordion-content p { font-weight: 300; padding-top: 8px !important; } .faqntl { font-size: 28px; line-height: 1.5; font-weight: 600; }</style><div class="faqpar"><div class="faqntl">Frequently Asked Questions</div><div class="faqaccordion"><div class="accordion-item"><div class="faqtlmn" id="accordion-button-1" aria-expanded="false" role="button"><span class="accordion-title">How does FIFO impact financial statements?</span><span class="icon" aria-hidden="true"></span></div><div class="accordion-content"><p>FIFO impacts financial statements by typically reporting higher profits during inflation. It results in lower cost of goods sold and higher ending inventory values on the balance sheet. This method often leads to more current inventory valuation and can affect key financial ratios used by investors and analysts.</p></div></div><div class="accordion-item"><div class="faqtlmn" id="accordion-button-2" aria-expanded="false" role="button"><span class="accordion-title">What is the difference between FIFO and LIFO?</span><span class="icon" aria-hidden="true"></span></div><div class="accordion-content"><p>FIFO operates on the principle that older stock exits first, while LIFO assumes newer items are sold before older ones. During inflationary periods, FIFO typically shows lower costs and higher profits, whereas LIFO often results in higher costs and lower profits. FIFO usually aligns more closely with the actual movement of goods in most businesses.</p></div></div><div class="accordion-item"><div class="faqtlmn" id="accordion-button-3" aria-expanded="false" role="button"><span class="accordion-title">What are the alternative inventory valuation methods?</span><span class="icon" aria-hidden="true"></span></div><div class="accordion-content"><p>Alternative methods include LIFO, Weighted Average Cost, Specific Identification, and Standard Costing. LIFO assumes the newest inventory is sold first, resulting in a higher cost of goods sold during inflation. Weighted Average Cost averages prices across all units. Specific Identification tracks individual item costs, while Standard Costing uses predetermined values while adjusting for variances over time.</p></div></div><div class="accordion-item"><div class="faqtlmn" id="accordion-button-4" aria-expanded="false" role="button"><span class="accordion-title">Which type of businesses typically use the LIFO method?</span><span class="icon" aria-hidden="true"></span></div><div class="accordion-content"><p>Businesses in industries with rising costs or prices typically use the LIFO method. This includes companies dealing with commodities, such as oil and gas firms, or those with inventory that doesn’t deteriorate, like metal or chemical producers. LIFO can offer tax benefits when prices are rising by showing reduced profits on paper.</p></div></div></div></div> <script>const items = document.querySelectorAll(".faqaccordion .faqtlmn"); function toggleAccordion() { const itemToggle = this.getAttribute('aria-expanded'); for (i = 0; i < items.length; i++) { items[i].setAttribute('aria-expanded', 'false'); } if (itemToggle == 'false') { this.setAttribute('aria-expanded', 'true'); } } items.forEach(item => item.addEventListener('click', toggleAccordion));</script> <div class="saboxplugin-wrap" ><div class="saboxplugin-tab"><div class="heading-section"><div class="identity-section"><div class="saboxplugin-gravatar"><img class="lazy lazy-hidden" decoding="async" loading="lazy" src="//www.softwaresuggest.com/blog/wp-content/plugins/a3-lazy-load/assets/images/lazy_placeholder.gif" data-lazy-type="image" data-src="https://softwareauggest-blogimages.s3.ca-central-1.amazonaws.com/blog/wp-content/uploads/2023/04/28165217/Rohit-Rajpal.jpg" width="100" height="100" alt="Rohit" ><noscript><img decoding="async" loading="lazy" src="https://softwareauggest-blogimages.s3.ca-central-1.amazonaws.com/blog/wp-content/uploads/2023/04/28165217/Rohit-Rajpal.jpg" width="100" height="100" alt="Rohit" ></noscript></div><div><div class="saboxplugin-authorname"><a href="https://www.softwaresuggest.com/blog/author/rohit-rajpal/" class="vcard author" rel="author" data-wpel-link="internal" target="_blank"><span class="fn">Rohit Rajpal</span></a></div><div class="sub-title">About the author</div></div></div><div class="saboxplugin-socials "><a title="Linkedin" target="_blank" href="https://www.linkedin.com/in/rajpalrohit04/" rel="nofollow noopener" class="saboxplugin-icon-grey"><svg aria-hidden="true" class="sab-linkedin" role="img" xmlns="http://www.w3.org/2000/svg" viewbox="0 0 448 512"><path fill="currentColor" d="M100.3 480H7.4V180.9h92.9V480zM53.8 140.1C24.1 140.1 0 115.5 0 85.8 0 56.1 24.1 32 53.8 32c29.7 0 53.8 24.1 53.8 53.8 0 29.7-24.1 54.3-53.8 54.3zM448 480h-92.7V334.4c0-34.7-.7-79.2-48.3-79.2-48.3 0-55.7 37.7-55.7 76.7V480h-92.8V180.9h89.1v40.8h1.3c12.4-23.5 42.7-48.3 87.9-48.3 94 0 111.3 61.9 111.3 142.3V480z"></path></svg></a></div></div><div class="saboxplugin-desc"><div ><p>Rohit Rajpal is an accomplished writer with a deep understanding of technology, digital marketing, and customer service. 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jQuery("body").removeClass('main_sendblue_body'); }); /* attachment download popup */ /* jQuery(".user_athpop_btn").click(function(){ }); */ jQuery("#athpopbtn_close_btn").click(function(){ jQuery(".athpop_back").hide(); jQuery("body").removeClass('main_athpop_body'); }); }); jQuery(document.body).append( jQuery('.signup_back').detach() );</script> <style type="text/css">.exit-intent-popup { position: fixed; top: 0; left: 0; bottom: 0; right: 0; z-index: 999999; transition: opacity 500ms; visibility: hidden; opacity: 0; background: rgba(0, 0, 0, 0.7); } .exit-intent-popup.visible { visibility: visible; opacity: 1; } #popupvrn { position: relative; display: none; visibility: hidden; opacity: 0; transition: transform 0.2s, opacity 0.2s, visibility 0s 0.2s; margin: 94px auto; text-align: center; box-shadow: 0 1px 10px rgba(0, 0, 0, 0.5); width: 900px; background: white; } #popupvrn .iti { width: 100%; } #popupvrn .mobileno_field { width: 94%; } #popupvrn .mobileno_field input { width: 100%; } .closeirvt{ font-size: 26px; position: absolute; top: 10px; right: 10px; color:#ffffff; text-decoration:none; z-index: 1; padding: 6px; cursor:pointer; } #popupvrn a{ color:#fff; right: 1%; } .exitiframe { width: 100%; height: 500px; } .mrvh3title { margin-top: 8px; } .call_support_exit_indent{ width: 140px; margin: 0 auto; } .looking_for_software_heding{ font-weight: bold; font-size: 22px; margin-bottom: 10px; line-height: 32px; padding-left: 10px; text-align: center; color: #37578A; margin-top: -22px; } .looking_for_software_msg{ font-size: 15px; color: #37578A; margin-top: unset; } .exit_popup_form{ background-color: #ffffff !important; } .ask_questionbtn_div button{ width: 100% !important; margin: 20px 0px !important; border-radius: 4px !important; height: 50px !important; font-size: 18px; background: #37578A; padding-left: 8px; padding-right: 8px; padding-top: 5px; padding-bottom: 5px; color: #fff; border: unset; cursor: pointer; } .exit_form_input_field{ width: 100%; margin: unset !important; 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